Graphic Packaging swings to Q3 loss of US$47.5M from profit of US$17.6M in year-ago period, affected by impairment charge; sales up 2.9% to US$1.07B with higher pricing, favorable exchange rates partially offset by lower volume/mix

Kendall Sinclair

MARIETTA, Georgia , October 27, 2011 (press release) – Graphic Packaging Holding Company (NYSE:GPK - News), a leading provider of packaging solutions to food, beverage and other consumer products companies, today reported Adjusted Net Income of $33.8 million, or $0.09 per share, based on 390.6 million weighted average diluted shares. This compares to third quarter 2010 Adjusted Net Income of $24.1 million, or $0.07 per share, based on 347.2 million weighted average diluted shares.

On an unadjusted basis, the Company reported a Net Loss for third quarter 2011 of $47.5 million, or $(0.12) per share, compared to third quarter 2010 Net Income of $17.6 million, or $0.05 per share. During the third quarter of 2011, the Company recorded a $96.3 million non-cash goodwill impairment charge for a reporting unit within its flexible packaging segment. The net impact of the charge was $80.0 million or $(0.20) per share, after deducting the associated income tax benefit of $16.3 million. Third quarter 2011 Net Loss also includes a $1.3 million charge associated with a loss on modification or extinguishment of debt. Third quarter 2010 Net Income includes $6.5 million of charges associated with a loss on modification or extinguishment of debt.

"We posted a solid quarter despite the continuation of soft demand in key end-markets and higher input costs," said CEO David Scheible. "The good news is that we are not seeing any additional deterioration in the market, but end consumers are still closely managing discretionary purchases including beer, soft drink, cereal and frozen pizza."

"Although volumes remain challenging, our top line increased 2.9% as we continued to recapture prior input inflation through higher contractual pricing. These higher prices, along with strong operating performance and improvements in our cost structure more than offset input cost inflation."

"Our ongoing cost reduction programs and supply chain optimization initiatives resulted in another $17 million of benefit in the quarter. We are now realizing benefits from our Perry, Georgia plant expansion, as the new press came online in the third quarter and production was successfully transitioned from other higher cost facilities, including our Cincinnati, Ohio plant, which has now been closed. We remain committed to keeping our manufacturing footprint in line with demand and, given the delayed market recovery, we also recently announced our intention to close our La Porte, Indiana web plant and transition its business to more efficient plants in our network. In total, we are still on target to achieve approximately $70 million of full year 2011 cost reduction."

Net Sales

Net sales increased 2.9% to $1,073.3 million during third quarter 2011, compared to third quarter 2010 net sales of $1,042.8 million. The increase resulted from approximately $29 million of higher pricing and $8 million of favorable exchange rates. This was partially offset by approximately $6 million of lower volume/mix.

On a segment basis, Paperboard Packaging sales, which comprised approximately 83% of total third quarter net sales, increased 2.4% compared to the third quarter of 2010. The increase reflects higher contractual pricing related to the recovery of prior input cost inflation and open market board price increases. Net sales in the Flexible Packaging segment increased 5.7% versus the third quarter of 2010. The increase was the result of higher pricing and slightly higher volume/mix.

Attached is supplemental data showing net tons sold, net sales and Income (Loss) from Operations by business segment for each quarter of 2011 and 2010.

EBITDA

EBITDA for third quarter 2011 was $54.4 million, compared to $144.8 million in the third quarter of 2010. Excluding goodwill impairment charges of $96.3 million and charges associated with a loss on modification or extinguishment of debt, third quarter 2011 Adjusted EBITDA was $152.0 million, compared to third quarter 2010 Adjusted EBITDA of $151.3 million. Third quarter 2010 Adjusted EBITDA excludes $6.5 million of charges associated with a loss on modification or extinguishment of debt.

Adjusted EBITDA in the third quarter of 2011 was positively impacted by approximately $29 million of higher pricing, approximately $17 million of improved net operating performance and approximately $1 million of favorable exchange rates/other. Third quarter 2011 EBITDA was negatively impacted by approximately $39 million of cost inflation, approximately $5 million related to market downtime taken in our converting facilities and approximately $2 million of lower volume/mix.

Other Results

In the third quarter of 2011, the Company recorded a non-cash pre-tax goodwill impairment charge of $96.3 million for a reporting unit within its flexible packaging segment. This charge is recorded as Goodwill Impairment, Restructuring and Other Special Charges in the Company's Condensed Consolidated Financial Statements. In addition, a tax benefit of $16.3 million was recorded and is included as Income Tax Benefit (Expense). The net impact of the charge is $80.0 million or $(0.20) per share.

Taking cash and cash equivalents into account, total Net Debt at the end of the third quarter of 2011 was $2,206.6 million. This represents a reduction of $352.8 million in Net Debt since September 30, 2010, including the retirement of the remaining $73.3 million of 9.5% Senior Subordinated Notes, which were called on August 15, 2011. The Company's Net Leverage Ratio decreased to 3.82 times Adjusted EBITDA at the end of the third quarter of 2011 from 4.53 times Adjusted EBITDA at September 30, 2010. At the end of the third quarter of 2011, the Company had available liquidity of $524.9 million including the undrawn availability under its $400 million revolving credit facility.

Net Cash Provided by Operations was $198.9 million in the nine months ended September 30, 2011, which compares to $169.0 million in the nine months ended September 30, 2010.

Net interest expense was $34.8 million in the third quarter of 2011 compared to $44.0 million in the third quarter of 2010. The decrease was due to both lower debt balances and lower interest rates.

Third quarter 2011 Income Tax Benefit (Expense) was $5.6 million compared to $(11.0) million in the third quarter of 2010. The Company has a $1.2 billion net operating loss carry-forward, which is currently being used and may be available to offset future taxable income in the United States.

Capital expenditures for third quarter 2011 were $37.6 million compared to $34.2 million in the third quarter of 2010. The increase was driven by additional investments to improve process capability and reduce costs.

Under the terms of its Credit Agreement, the Company must comply with a maximum consolidated secured leverage ratio. As of September 30, 2011, the Company's ratio was 2.49 to 1.00, in compliance with the required maximum ratio of 4.75 to 1.00. The calculation of this ratio, along with a tabular reconciliation of EBITDA, Adjusted EBITDA, Credit Agreement EBITDA, Adjusted Net Income and Net Leverage Ratio, is attached to this release.

Earnings Call

The Company will host a conference call at 10:00 am eastern time today (October 27, 2011) to discuss the results of third quarter 2011. To access the conference call, listeners calling from within North America should dial 800-392-9489 at least 10 minutes prior to the start of the conference call (Conference ID#14266387). Listeners may also access the audio webcast, along with a slide presentation, at the Investor Relations section of the Graphic Packaging website: http://www.graphicpkg.com. Replays of the call can be accessed for one week by dialing 855-859-2056.


About Graphic Packaging Holding Company

Graphic Packaging Holding Company (NYSE:GPK - News), headquartered in Marietta, Georgia, is a leading provider of packaging solutions for a wide variety of products to food, beverage and other consumer products companies. The Company is one of the largest producers of folding cartons and holds a leading market position in coated-unbleached kraft, coated-recycled boxboard and specialty packaging. The Company's customers include some of the most widely recognized companies in the world. Additional information about Graphic Packaging, its business and its products, is available on the Company's web site at www.graphicpkg.com.

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